Mifid II will transform the securities market in Europe. The mammoth piece of regulation includes new rules for anonymous trading venues known as dark pools, controls on electronic trading and measures for increasing competition in the derivatives markets.

Michel Barnier, the European Commissioner for internal market and services, said the rules - which have taken over three years to thrash out – were “a key step towards establishing a safer, more open and more responsible financial system and restoring investor confidence in the wake of the financial crisis”.

Now that the three European legislators have reached an accord, the final text must be translated into all EU languages before facing a final vote among all MEPs.

A spokesman for Esma said: “We have already started the preparatory work on Mifid II but we will need a complete and final legal text before the starter gun on Esma’s work can be fired.”

Esma’s work will consist of an initial call for general market comment on the issues it needs to tackle, followed by a set of draft technical standards based on the market feedback it receives. A set of final technical standards will eventually be issued and this document will likely be published at well over 200 pages, according to the Esma spokesman.

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Before Christmas, Esma selected three organisations - the Centre for European Policy Studies, Insead OEE Data Services and capital markets consultancy Tabb Group – to help craft the technical details for Mifid.

Rebecca Healey, senior analyst at Tabb, said: “The most important factor is that we have moved onto the next stage and we can now work with the market to ensure we are providing a full impact assessment that will help achieve the best results for the underlying investor. Our work will be a mix of academic and industry practice to ensure we are investigation all potential solutions that will be beneficial for the industry overall.”

Enter the OTFs

Mifid II forms part of the EU’s commitment to reduce systemic risk in the over-the-counter derivatives market through G20-led reforms. The directive creates a new type of trading venue - known as an organised trading facility, or OTF - for swaps that have historically been negotiated privately between two counterparts.

The Esma spokesman said deciding which derivatives contracts are suitable for the new venues would be one of its key priorities because of the need to harmonise rules with other regions implementing the G20 reforms.

Access all areas

Mifid II will also encourage competition in derivatives markets through ‘open access’, which will allow users to process trades through a clearing house of their choice. Open access was one of the most contentious areas of debates between EU legislators and its effectiveness will largely depend on the technical details that will be determined by Esma.

Under the agreement, it could be possible for markets to delay the introduction of open access for up to five years from the time Mifid II comes into force.

Another area that many brokers will be watching closely is the new framework for trading on dark pools, markets that allow buyers and sellers to trade without revealing their identity, trade size or price.

Into the light

Mifid II will limit dark trading to 4% of overall European share trading turnover per venue, and at 8% on an EU-wide basis. Esma will have to determine how these limits are applied.

Andrew Bowley, head of business operations and risk at agency broker Instinet Europe, said: “One consideration for dark pool thresholds is what is included as part of calculations of overall trading activity and whether this will be tied to the consolidated tape. Instinctively, the 8% threshold will be a constraint for the industry. There has been some conversation on an industry-wide mechanism that will allow people to collectively contain trading within the 8% threshold.”

Taming the algos

The directive also introduces new controls for firms that trade using algorithmic strategies, including minimum standards for electronic market makers and the need for systems and controls for brokers that provide clients with direct access to markets.

Bowley said: “With or without Mifid II there is a continuous evolution of the supervision the market faces in terms of the electronic trading tools we use. The Mifid II rules are another part of this ongoing process. The bit that isn’t clear yet is the extent to which regulators will monitor the algos themselves.”

Esma’s work will have some involvement in pre and post-trade transparency for equity and bond markets as well as the framework that will determine the overall positions that firms can hold in commodities and their derivatives.

--write to apuaar@efinancialnews.com and follow on Twitter: @anishpuaar